UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
Commission File No.: 0-11113
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ____________
PACIFIC CAPITAL BANCORP
(Exact Name of Registrant as Specified in its Charter)
California 95-3673456
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 E. Carrillo Street, Santa Barbara, California 93101
(Address of principal executive offices) (Zip Code)
(805) 564-6300
(Registrant's telephone number, including area code)
Not Applicable
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Common Stock - As of May 14, 1999 there were 24,350,456 shares of the issuer's
common stock outstanding.
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998
Consolidated Statements of Income
Three-Month Periods Ended March 31, 1999 and 1998
Consolidated Statements of Comprehensive Income
Three-Month Periods Ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows
Three-Month Periods Ended March 31, 1999 and 1998
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Disclosures about quantitative and qualitative market risk are
located in Management's Discussion and Analysis of Financial
Condition and Results of Operations in the section on interest
rate sensitivity.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
All other schedules and compliance information called for by the instructions to
Form 10-Q have been omitted since the required information is not applicable.
<PAGE>
<TABLE>
PART 1
FINANCIAL INFORMATION
PACIFIC CAPITAL BANCORP & SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(dollars in thousands except share amounts)
<CAPTION>
March 31, December 31,
1999 1998
------------- -------------
<S> <C> <C>
Assets:
Cash and due from banks $ 115,394 $ 114,206
Federal funds sold 71,746 69,890
Money market funds 4,050 1,567
------------ ------------
Cash and cash equivalents 191,190 185,663
------------ ------------
Securities (Note 4):
Held-to-maturity 173,447 194,769
Available-for-sale 544,024 596,996
Bankers' acceptances and commercial paper 9,992 19,888
Loans, net of allowance of $31,508 at
March 31, 1999 and $29,296 at
December 31, 1998 (Note 5) 1,676,253 1,553,485
Premises and equipment, net (Note 6) 30,321 29,916
Accrued interest receivable 15,487 15,944
Other assets (Note 7) 59,548 52,757
------------ ------------
Total assets $ 2,700,262 $ 2,649,418
============ ============
Liabilities:
Deposits:
Noninterest bearing demand deposits $ 499,953 $ 498,266
Interest bearing deposits 1,861,757 1,831,410
------------ ------------
Total Deposits 2,361,710 2,329,676
------------ ------------
Securities sold under agreements
to repurchase and Federal
funds purchased 16,670 27,796
Long-term debt and other borrowings (Note 8) 57,309 44,953
Accrued interest payable and other liabilities 40,382 32,993
------------ ------------
Total liabilities 2,476,071 2,435,418
------------ ------------
Shareholders' equity
Common stock (no par value;
$0.33 per share stated value;
40,000,000 authorized; 24,346,684
outstanding at March 31, 1999
and 24,208,782 at December 31, 1998) 8,117 8,071
Surplus 96,902 95,498
Accumulated other comprehensive income (Note 9) 2,099 3,496
Retained earnings 117,073 106,935
------------ ------------
Total shareholders' equity 224,191 214,000
------------ ------------
Total liabilities and
shareholders' equity $ 2,700,262 $ 2,649,418
============ ============
<FN>
See accompanying notes to consolidated condensed financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the Three-Month
Periods Ended
March 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 43,154 $ 36,922
Interest on securities 11,264 11,233
Interest on Federal funds
sold and securities purchased
under agreement to resell 1,970 1,822
Interest on BA's & comm'l paper 257 689
------------ ------------
Total interest income 56,645 50,666
------------ ------------
Interest expense:
Interest on deposits 15,277 15,687
Interest on securities sold under
agreements to repurchase and
Federal funds purchased 262 298
Interest on other borrowed funds 731 597
------------ ------------
Total interest expense 16,270 16,582
------------ ------------
Net interest income 40,375 34,084
Provision for loan losses 3,719 5,949
------------ ------------
Net interest income after
provision for loan losses 36,656 28,135
------------ ------------
Other operating income:
Service charges on deposits 2,361 2,272
Trust fees 3,351 2,865
Other service charges,
commissions and fees 7,973 6,248
Net (loss) gain on
securities transactions (177) 57
Other operating income 307 249
------------ ------------
Total other income 13,815 11,691
------------ ------------
Other operating expense:
Salaries and benefits 12,795 12,660
Net occupancy expense 2,298 2,043
Equipment expense 1,560 1,459
Other expense 10,377 6,541
------------ ------------
Total other operating expense 27,030 22,703
------------ ------------
Income before income taxes 23,441 17,123
Applicable income taxes 8,920 6,402
------------ ------------
Net income $ 14,521 $ 10,721
============ ============
Earnings per share - basic (Note 2) $ 0.60 $ 0.45
Earnings per share - diluted (Note 2) $ 0.59 $ 0.44
<FN>
See accompanying notes to consolidated condensed financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PACIFIC CAPITAL BANCORP & SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Unaudited)
(dollars in thousands except per share amounts)
<CAPTION>
For the Three-Month
Periods Ended
March 31,
----------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Net income $ 14,521 $ 10,721
Other comprehensive income,
net of tax (Note 9):
Unrealized loss on securities:
Unrealized holding losses
arising during period (1,220) (158)
Less: reclassification
adjustment for (losses) gains
included in net income (177) 57
------------- -------------
Other comprehensive income (1,397) (101)
------------- -------------
Comprehensive income $ 13,124 $ 10,620
============= =============
</TABLE>
<PAGE>
<TABLE>
PACIFIC CAPITAL BANCORP & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
<CAPTION>
For the Three Month
Periods Ended March 31,
1999 1998
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 14,521 $ 10,721
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 1,573 453
Provision for loan and lease losses 3,719 5,949
Net amortization of discounts and premiums for
securities and bankers' acceptances and
commercial paper (1,663) 1,126
Net change in deferred loan origination
fees and costs 165 (308)
Net (gain) loss on sales and calls of securities 178 (53)
Change in accrued interest receivable and other assets (8,091) 1,640
Change in accrued interest payable and other liabilities 7,364 4,346
----------- -----------
Net cash provided by operating activities 17,766 23,874
----------- -----------
Cash flows from investing activities:
Proceeds from call or maturity of securities 96,066 39,665
Purchase of securities (30,404) (29,646)
Proceeds from sale of securities 9,881 15,046
Proceeds from maturity of bankers' acceptances and
commercial paper 35,000 26,097
Purchase of bankers' acceptances and commercial paper (24,868) (14,670)
Net increase in loans made to customers (126,510) (43,752)
Purchase or investment in premises and equipment (1,618) (2,257)
----------- -----------
Net cash used in investing activities (42,453) (9,517)
----------- -----------
Cash flows from financing activities:
Net increase in deposits 32,034 47,739
Net decrease in borrowings with maturities
of 90 days or less (11,126) (899)
Net increase (decrease) in long-term debt and other
borrowings 12,356 (2,500)
Proceeds from issuance of common stock 1,308 1,190
Payments to retire common stock -- (1,818)
Dividends paid (4,358) (2,846)
----------- -----------
Net cash provided by financing activities 30,214 40,866
----------- -----------
Net increase in cash and cash equivalents 5,527 55,223
Cash and cash equivalents at beginning of period 185,663 194,318
----------- -----------
Cash and cash equivalents at end of period $ 191,190 $ 249,541
=========== ===========
Supplemental disclosure:
Cash paid for the three months ended:
Interest $ 16,809 $ 17,021
Income taxes $ 4,662 $ 150
Non-cash additions to other real estate owned $ -- $ 200
Non-cash additions to loans $ 142 $ 317
<FN>
See accompanying notes to consolidated condensed financial statements
</FN>
</TABLE>
<PAGE>
Santa Barbara Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1999
(Unaudited)
1. Principles of Consolidation
The consolidated financial statements include the parent holding company,
Pacific Capital Bancorp ("Bancorp"), and its wholly owned subsidiaries, Santa
Barbara Bank & Trust ("SBB&T"), First National Bank of Central California
("FNB") and its affiliate South Valley National Bank ("SVNB"), and Sanbarco
Mortgage Corporation. All references to "the Company" apply to Pacific Capital
Bancorp and its subsidiaries. "Bancorp" will be used to refer to the parent
company only. Material intercompany balances and transactions have been
eliminated.
2. Earnings Per Share
Earnings per share for all periods presented in the Consolidated Statements of
Income are computed based on the weighted average number of shares outstanding
during each year retroactively restated for stock dividends and stock splits.
Diluted earnings per share include the effect of the potential issuance of
common shares. For the Company, these include only shares issuable on the
exercise of outstanding stock options.
For the three-month period ended March 31, 1999 and 1998, the computation of
basic and diluted earnings per share was as follows (shares and net income
amounts in thousands):
<TABLE>
<CAPTION>
Three-month Period
Basic Diluted
Earnings Earnings
Per Share Per Share
--------- ---------
<S> <C> <C>
March 31, 1999
Numerator --net income $ 14,521 $ 14,521
Denominator --weighted average
shares outstanding 24,240 24,240
Plus: net shares issued in
assumed stock option exercises 372
Diluted denominator 24,612
Earnings per share $0.60 $0.59
March 31, 1998
Numerator --net income $ 10,721 $ 10,721
Denominator --weighted average
shares outstanding 23,598 23,598
Plus: net shares issued in
assumed stock option exercises 678
Diluted denominator 24,276
Earnings per share $0.45 $0.44
</TABLE>
Weighted average shares and net shares issued in assumed stock option exercises
for the three-month period ended March 31, 1998 were adjusted for the 2 for 1
stock split paid on April 16, 1998.
3. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in a condensed format, and therefore do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of Management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been reflected in the financial statements. However, the results of
operations for the three-month period ended March 31, 1999, are not necessarily
indicative of the results to be expected for the full year. Certain amounts
reported for 1998 have been reclassified to be consistent with the reporting for
1999.
For the purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks, money market funds, Federal funds sold, and securities
purchased under agreement to resell.
4. Securities
The Company's securities are classified as either "held-to-maturity" or
"available-for-sale." Securities for which the Company has positive intent and
ability to hold until maturity are classified as held-to-maturity. Securities
that might be sold prior to maturity because of interest rate changes, to meet
liquidity needs, or to better match the repricing characteristics of funding
sources are classified as available-for-sale. If the Company were to purchase
securities principally for the purpose of selling them in the near term for a
gain, they would be classified as trading securities. The Company holds no
securities that should be classified as trading securities.
Securities that are classified as held-to-maturity are carried at amortized
historical cost. Amortized historical cost is the purchase price increased by
the accretion of discounts or decreased by the amortization of premiums using
the effective interest method. Discount is any excess of the face value of the
security over the cost. Premium is any excess of cost over the face value of the
security. Discount is accreted and premium is amortized over the period to
maturity of the related securities, or to an earlier call date, if appropriate.
The interest income from securities that are classified as available-for-sale is
recognized in the same manner as for securities that are classified as
held-to-maturity, including the accretion of discounts and the amortization of
premiums. However, unlike the securities that are classified held-to-maturity,
securities classified available-for-sale are reported in the financial
statements at fair market value rather than at amortized cost. The after-tax
effect of unrealized gains or losses is reported as accumulated other
comprehensive income as explained in Note 8. Changes in the unrealized gains or
losses are shown as increases or decreases in this component of equity, but are
not reported as gains or losses in the statements of income of the Company.
SBB&T and FNB are members of the Federal Reserve Bank of San Francisco ("FRB").
SBB&T is a member of the Federal Home Loan Bank of San Francisco ("FHLB"). The
banks are required to purchase shares of stock in these two organizations as a
condition of membership. These shares are reported as equity securities.
The amortized historical cost and estimated market value of debt securities by
contractual maturity are shown below. The issuers of certain of the securities
have the right to call or prepay obligations before the contractual maturity
date. Depending on the contractual terms of the security, the Company may
receive a call or prepayment penalty in such instances.
<TABLE>
<CAPTION>
(in thousands) Held-to- Available-
Maturity for-Sale Total
---------------------------------------
<S> <C> <C> <C>
March 31, 1999
Amortized cost:
In one year or less $ 45,339 $ 65,275 $ 110,614
After one year through five years 83,632 236,894 320,526
After five years through ten years 5,516 34,068 39,584
After ten years 38,960 195,069 234,029
Equity securities -- 9,177 9,177
---------------------------------------
Total securities $ 173,447 $ 540,483 $ 713,930
=======================================
Estimated market value:
In one year or less $ 46,061 $ 65,648 $ 111,709
After one year through five years 89,516 239,360 328,876
After five years through ten years 6,533 34,276 40,809
After ten years 45,985 195,563 241,548
Equity securities -- 9,177 9,177
---------------------------------------
Total securities $ 188,095 $ 544,024 $ 732,119
=======================================
December 31,1998 Amortized cost:
In one year or less $ 46,931 $ 128,259 $ 175,190
After one year through five years 97,704 371,370 469,074
After five years through ten years 10,973 62,809 73,782
After ten years 39,161 18,725 57,886
Equity securities -- 9,086 9,086
---------------------------------------
Total securities $ 194,769 $ 590,249 $ 785,018
=======================================
Estimated market value:
In one year or less $ 47,222 $ 128,853 $ 176,075
After one year through five years 103,525 376,919 480,444
After five years through ten years 13,664 63,236 76,900
After ten years 46,981 18,902 65,883
Equity securities -- 9,086 9,086
---------------------------------------
Total securities $ 211,392 $ 596,996 $ 808,388
=======================================
</TABLE>
The amortized historical cost, market values and gross unrealized gains and
losses of securities are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
(in thousands) Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------------------------------------------------
<S> <C> <C> <C> <C>
March 31,1999
Held-to-maturity:
U.S. Treasury obligations $ 57,771 $ 595 $ -- $ 58,366
U.S. agency obligations 12,504 84 -- 12,588
Mortgage-backed securities 662 25 -- 687
State and municipal securities 102,510 13,967 (23) 116,454
------------------------------------------------------
Total held-to-maturity 173,447 14,671 (23) 188,095
------------------------------------------------------
Available-for-sale:
U.S. Treasury obligations 134,200 1,799 -- 135,999
U.S. agency obligations 138,699 935 (145) 139,489
Mortgage-backed securities 213,265 1,246 (592) 213,919
Asset-backed securities 17,491 18 (8) 17,501
State and municipal securities 27,651 377 (89) 27,939
Equity securities 9,177 -- -- 9,177
------------------------------------------------------
Total available-for-sale 540,483 4,375 (834) 544,024
------------------------------------------------------
Total securities $ 713,930 $ 19,046 $ (857) $ 732,119
======================================================
December 31, 1998 Held-to-maturity:
U.S. Treasury obligations $ 57,872 $ 946 $ -- $ 58,818
U.S. agency obligations 22,491 218 -- 22,709
Mortgage-backed securities 715 22 (4) 733
State and municipal securities 113,691 15,483 (42) 129,132
------------------------------------------------------
Total held-to-maturity 194,769 16,669 (46) 211,392
------------------------------------------------------
Available-for-sale:
U.S. Treasury obligations 147,378 3,112 -- 150,490
U.S. agency obligations 175,780 1,798 (85) 177,493
Mortgage-backed securities 217,823 1,634 (302) 219,155
Asset-backed securities 13,849 45 -- 13,894
State and municipal securities 26,333 564 (19) 26,878
Equity securities 9,086 -- -- 9,086
------------------------------------------------------
Total available-for-sale 590,249 7,153 (406) 596,996
------------------------------------------------------
Total securities $ 785,018 $ 23,822 $ (452) $ 808,388
======================================================
</TABLE>
The Company does not expect to realize any of the unrealized gains or losses
related to the securities in the held-to-maturity portfolio because it is the
Company's intent to hold them to maturity. At that time the par value will be
received. An exception to this expectation occurs when securities are called by
the issuer prior to their maturity. In these situations, gains or losses may be
realized. Gains or losses may be realized on securities in the
available-for-sale portfolio as the result of sales of these securities carried
out in response to changes in interest rates or for other reasons related to the
management of the components of the balance sheet.
5. Loans
The balances in the various loan categories are as follows:
<TABLE>
<CAPTION>
(in thousands) March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Real estate:
Residential $ 432,025 $ 368,306
Non-residential 496,821 477,120
Construction 119,274 109,764
Commercial loans 368,427 362,262
Home equity loans 44,588 47,123
Consumer loans 143,566 123,730
Leases 89,057 78,627
Municipal tax-exempt obligations 8,540 9,286
Other loans 5,463 6,563
------------ ------------
Total loans $ 1,707,761 $ 1,582,781
============ ============
</TABLE>
The loan balances at March 31, 1999 and December 31, 1998 are net of
approximately $4,162,000 and $4,624,000, respectively, in deferred net loan fees
and origination costs.
Specific kinds of loans are identified as impaired when it is probable that
interest and principal will not be collected according to the contractual terms
of the loan agreements. Because this definition is very similar to that used by
Management to determine on which loans interest should not be accrued, the
Company expects that most impaired loans will be on nonaccrual status.
Therefore, in general, the accrual of interest on impaired loans is
discontinued, and any uncollected interest is written off against interest
income in the current period. No further income is recognized until all recorded
amounts of principal are recovered in full or until circumstances have changed
such that the loan is no longer regarded as impaired.
There are some loans about which there is doubt regarding the collectibility of
interest and principal according to the contractual terms, but which are fully
secured by collateral and for which collection is being actively pursued. These
impaired loans are not classified as nonaccrual.
Impaired loans are reviewed each quarter to determine whether a valuation
allowance for loan loss is required. The amount of the valuation allowance for
impaired loans is determined by comparing the recorded investment in each loan
with its value measured by one of three methods. The first method is to estimate
the expected future cash flows and then discount them at the effective interest
rate. The second method is to use the loan's observable market price if the loan
is of a kind for which there is a secondary market. The third method is to use
the value of the underlying collateral. A valuation allowance is established for
any amount by which the recorded investment exceeds the value of the impaired
loan. If the value of the loan as determined by the selected method exceeds the
recorded investment in the loan, no valuation allowance for that loan is
established. The following table discloses balance information about the
impaired loans and the related allowance (dollars in thousands) as of March 31,
1999 and December 31, 1998:
March 31, 1999 December 31, 1998
Loans identified as impaired $ 13,273 $3,286
Impaired loans for which a valuation
allowance has been determined $ 8,632 $1,574
Impaired loans for which no valuation
allowance was determined necessary $ 4,641 $1,712
Amount of valuation allowance $ 3,342 $ 98
Because the loans currently identified as impaired have unique risk
characteristics, the valuation allowance was determined on a loan-by-loan basis.
Few impaired loans required a valuation allowance at March 31, 1999 and December
31, 1998, because for most impaired loans, the collateral is in excess of the
recorded investment.
The following table discloses additional information (dollars in thousands)
about impaired loans for the three-month periods ended March 31, 1999 and 1998:
Three-month Periods
Ended March 31,
1998 1997
Average amount of recorded
investment in impaired loans $13,368 $8,714
Collections of interest from
impaired loans and recognized
as interest income $ -- $ --
The Company also provides an allowance for credit losses for other loans. These
include (1) groups of loans for which the allowance is determined by historical
loss experience ratios for similar loans; (2) specific loans that are not
included in one of the types of loans covered by the concept of "impairment" but
for which repayment is nonetheless uncertain; and (3) losses inherent in the
various loan portfolios, but which have not been specifically identified as of
the period end. The amount of the various components of the allowance for credit
losses are based on review of individual loans, historical trends, current
economic conditions, and other factors. This process is explained in detail in
the notes to the Company's Consolidated Financial Statements in its Annual
Report on Form 10-K for the year ended December 31, 1998.
Loans that are deemed to be uncollectible are charged-off against the allowance
for credit losses. Uncollectibility is determined based on the individual
circumstances of the loan and historical trends.
The valuation allowance for impaired loans of $3.3 million is included with the
general allowance for credit losses to total the $31.5 million reported on the
balance sheet for March 31, 1999, which these notes accompany, and in the "All
Other Loans" column in the statement of changes in the allowance account for the
first three months of 1999 shown below. The amounts related to tax refund
anticipation loans and to all other loans are shown separately.
<TABLE>
<CAPTION>
Refund
(in thousands) Anticipation All
Loans Other Loans Total
----------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1998 $ 333 $ 28,963 $ 29,296
Provision for loan losses 2,759 960 3,719
Loan losses charged
against allowance (3,323) (965) (4,288)
Loan recoveries added to allowance 2,102 679 2,781
--------- ----------- -----------
Balance, March 31, 1999 $ 1,871 $ 29,637 $ 31,508
========= =========== ===========
</TABLE>
6. Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is charged to income over the estimated useful lives
of the assets, generally by the use of an accelerated method in the early years,
switching to the straight line method in later years. Leasehold improvements are
amortized over the terms of the related lease or the estimated useful lives of
the improvements, whichever is shorter. Depreciation expense (in thousands) was
$1,213 and $1,202 for the three-month period ended March 31, 1999 and 1998,
respectively. The following table shows the balances by major category of fixed
assets:
<TABLE>
<CAPTION>
(in thousands) March 31, 1999 December 31, 1998
--------------------------------- -----------------------------------
Accumulated Net Book Accumulated Net Book
Cost Depreciation Value Cost Depreciation Value
--------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Land and buildings $ 24,309 $ 6,840 $ 17,469 $ 24,172 $ 6,673 $ 17,499
Leasehold improvements 9,208 6,823 2,385 9,150 6,696 2,454
Furniture and equipment 36,983 26,516 10,467 35,594 25,631 9,963
--------------------------------- -----------------------------------
Total $ 70,500 $ 40,179 $ 30,321 $ 68,916 $ 39,000 $ 29,916
================================= ===================================
</TABLE>
7. Other Assets
Property acquired as a result of defaulted loans is included within other assets
on the balance sheets. Property from defaulted loans is carried at the lower of
the outstanding balance of the related loan at the time of foreclosure or the
estimate of the market value of the assets less disposal costs. As of March 31,
1999 and December 31, 1998, the Company held some properties which it had
obtained in foreclosures. However, because of the uncertainty relating to
realizing any proceeds from their disposal in excess of the cost of disposal,
the Company had written their carrying value down to zero.
Also included in other assets on the balance sheet for March 31, 1999 and
December 31, 1998, are deferred tax assets and goodwill. In connection with the
acquisitions, the Company recognized the excess of the purchase price over the
estimated fair value of the assets received and liabilities assumed as $19.9
million of goodwill. The purchased goodwill is being amortized over 10 and 15
year periods. Intangible assets, including goodwill, are reviewed each year to
determine if circumstances related to their valuation have been materially
affected. In the event that the current market value is determined to be less
than the current book value of the intangible asset, a charge against current
earnings would be recorded.
8. Long-term Debt and Other Borrowings
Long-term debt and other borrowings included $56.0 million and $42.9 million of
advances from the FHLB at March 31, 1999 and December 31, 1998, respectively.
9. Comprehensive Income
Components of comprehensive income are changes in equity during a period other
than those resulting from investments by owners and distributions to owners. For
the Company, the only component of comprehensive income other than net income is
the unrealized gain or loss on securities classified as available-for-sale. The
aggregate amount of such changes to equity that have not yet been recognized in
net income are reported in the equity portion of the Consolidated Balance Sheets
as accumulated other comprehensive income. When a security that had been
classified as available-for-sale is sold, a realized gain or loss will be
included in net income and, therefore, in comprehensive income. Consequently,
the recognition of any unrealized gain or loss for that security that had been
included in comprehensive income in an earlier period must be reversed. These
adjustments are reported in the consolidated statements of comprehensive income
as reclassification adjustment for gains (losses) included in net income.
10. Segment Disclosure
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information", was issued on June 30, 1997 and
became effective for the Company for its 1998 Annual Report on Form 10-K. This
statement relates to disclosure only and has no impact on the financial
condition or operating results of the Company. While the Company's products and
services are all of the nature of commercial banking, the Company has seven
reportable segments. There are six specific segments: Wholesale Lending, Retail
Lending, Branch Activities, Fiduciary, Tax Refund Processing, and the Northern
Region. The remaining activities of the Company are reported in a segment titled
"All Other". Detailed information regarding the Company's segments is provided
in Note 20 to the consolidated financial statements included in the Company's
1998 Annual Report on Form 10-K. This information includes descriptions of the
factors used in identifying these segments, the types and services from which
revenues for each segment are derived, charges and credits for funds, and how
the specific measure of profit or loss was selected. Readers of these interim
statements are referred to that information to better understand the following
disclosures for each of the segments. There have been no changes in the basis of
segmentation or in the measurement of segment profit or loss from the
description given in the annual report.
The following table presents information for each segment regarding assets,
profit or loss, and specific items of revenue and expense that are included in
that measure of segment profit or loss as reviewed by the chief operating
decision maker.
<TABLE>
<CAPTION>
(in thousands) Branch Retail Wholesale Tax Refund Northern All
Activities Lending Lending Processing Fiduciary Region Other Total
---------- ------- ------- ---------- --------- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Quarter ended
March 31, 1999
Revenues from
external
customers $ 2,077 $ 12,227 $ 12,391 $13,384 $3,401 $ 16,512 $ 11,899 $ 71,891
Intersegment
revenues 18,812 -- -- 1,713 620 -- 3,537 24,682
------- ------- -------- ------- ------ -------- -------- ----------
Total revenues $20,889 $12,227 $ 12,391 $15,097 $4,021 $ 16,512 $ 15,436 $ 96,573
======= ======= ======== ======= ====== ======== ======== ==========
Profit (Loss) $23,394 $ 2,937 $ 4,163 $11,248 $2,473 $ 5,777 $ (438) $ 49,554
Interest income $ 14 $ 11,918 $ 12,006 $ 7,477 -- $ 15,597 $ 11,064 $ 58,076
Interest expense $10,471 $ 2 -- -- -- $ 4,981 $ 816 $ 16,270
Internal charge
for funds $ 199 $ 7,532 $ 6,422 $ 546 $ 556 -- $ 9,427 $ 24,682
Depreciation $ 399 $ 37 $ 23 $ 24 $ 36 $ 331 $ 352 $ 1,202
Total assets $13,035 $611,099 $538,730 $13,552 $1,408 $851,006 $671,432 $2,700,262
Capital
expenditures -- -- -- -- -- $ 35 $ 1,569 $ 1,604
Quarter ended
March 31, 1998
Revenues from
external
customers $ 1,896 $ 10,069 $ 10,752 $10,771 $2,962 $ 15,516 $ 11,792 $ 63,758
Intersegment
revenues 18,274 -- -- 846 531 -- 2,687 22,338
------- -------- -------- ------- ------ -------- -------- ----------
Total revenues $20,170 $ 10,069 $ 10,752 $11,617 $3,493 $ 15,516 $ 14,479 $ 86,096
======= ======== ======== ======= ====== ======== ======== ==========
Profit $21,798 $ 1,586 $ 3,970 $ 5,589 $2,114 $ 5,002 $ 803 $ 40,862
Interest income $ 8 $ 9,715 $ 10,406 $ 6,391 -- $ 14,678 $ 10,869 $ 52,067
Interest expense $10,840 $ 1 $ 1 -- -- $ 4,967 $ 773 $ 16,582
Internal charge
for funds $ 181 $ 5,990 $ 5,942 $ 470 $ 494 $ -- $ 9,261 $ 22,338
Depreciation $ 465 $ 55 $ 29 $ 13 $ 48 $ 330 $ 273 $ 1,213
Total assets $12,456 $438,680 $447,637 $ 7,183 $1,431 $773,061 $742,999 $2,423,447
Capital
expenditures -- -- -- -- -- $ 384 $ 1,943 $ 2,327
</TABLE>
The following table reconciles total revenues and profit for the segments to
total revenues and pre-tax income, respectively in the consolidated financial
statements.
<TABLE>
<CAPTION>
Quarter ended March 31,
1999 1998
<S> <C> <C>
Total revenues for
reportable segments $96,573 $86,096
Elimination of
intersegment revenues (24,682) (22,338)
Elimination of taxable
equivalent adjustment (1,431) (1,401)
Total consolidated revenues $70,460 $62,357
Total profit or loss
for reportable segments $49,554 $40,862
Elimination of
intersegment revenues (24,682) (22,338)
Elimination of taxable
equivalent adjustment (1,431) (1,401)
Income before income taxes $23,441 $17,123
</TABLE>
11. New Accounting Pronouncement
Statement of Financial Accounting Standards No. 133, "Accounting Derivative
Instruments and Hedging Activities", was issued during the second quarter of
1998 and will become effective for the Company as of January 1, 2000. This
statement is not expected to have a material impact on the operating results or
the financial position of the Company.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SUMMARY
Pacific Capital Bancorp and its wholly owned subsidiaries (the "Company") posted
earnings of $14.5 million for the quarter ended March 31, 1999, up 35% over the
same quarter last year. Diluted per share earnings for the first quarter of 1999
were $0.59 compared to $0.44 earned in the first quarter of 1998. The increase
in net income for the quarter compared to the same quarter of 1998 was due to an
expansion in the tax refund programs as well as increases in net interest income
and other fee income.
Compared to the first quarter of 1998, net interest income (the difference
between interest income and interest expense) increased by $6.3 million in the
first quarter of 1999, an increase of 18%. This was due primarily to additional
interest on loans, as the loan balances increased 26.3% from $1.4 billion at
March 31, 1998, to $1.7 billion a year later. At $43.2 million, interest income
from loans for the quarter was up $6.2 million (including an increase of $1.1
million in interest income from tax refund loans) or 16.9%. Interest income
increased at a lower rate than loans because of the decrease in market interest
rates during the last 12 months. Deposits increased $226 million or 10.6% over
the last 12 months, while interest expense decreased 2.6% due to the lower
rates.
Noninterest income, exclusive of gains or losses on securities transactions,
increased by $2.4 million over the same quarter of 1998. Fees from tax refund
transfers was up $1.6 million over the amount earned in the first quarter of
1998, and Trust and Investment Services fees were up $486,000.
Provision expense for first quarter of 1999 for loans other than tax refund
loans was $960,000, slightly more than the $727,000 provided in the first
quarter of 1998. The provision expense for tax refund loans was $2.8 million for
the first quarter of 1999 compared to $5.9 million for the corresponding period
of 1998.
Noninterest expenses increased in the first quarter of 1999 compared to the same
quarter of 1998, due both to geographic expansion and to expenses incurred in
connection with integration project for the data processing systems after the
merger and with addressing the Century Date Change ("Y2K"). These additional
expenses resulted in a slight increase in the Company's operating efficiency
ratio, which measures what proportion of a dollar of operating income it takes
to earn that dollar, from 48.2% for the first of 1998 to 48.4% for the first
quarter of 1999.
BUSINESS
The Company is a bank holding company. Its major subsidiaries are Santa Barbara
Bank & Trust ("SBB&T") and First National Bank of Central California ("FNB")
including its affiliate South Valley National Bank ("SVNB"). While Bancorp has a
few operations of its own, these are not significant in comparison to those of
its major subsidiaries. SBB&T is a state-chartered commercial bank and is a
member of the Federal Reserve System. FNB is a nationally chartered commercial
bank and is also a member of the Federal Reserve System. They offer a full range
of retail and commercial banking services. These include commercial, real
estate, and consumer loans, a wide variety of deposit products, and full trust
services. The Company's third active subsidiary is Sanbarco Mortgage Corporation
("Sanbarco"). The primary business activity of Sanbarco is brokering commercial
real estate loans and servicing those loans for a fee. The Company has one
inactive subsidiary, Pacific Capital Services Corporation. All references to
"the Company" apply to Pacific Capital Bancorp and its subsidiaries. "Bancorp"
will be used to refer to the parent company only.
FORWARD-LOOKING INFORMATION
This analysis contains forward-looking statements with respect to the financial
conditions, results of operations and businesses of Pacific Capital Bancorp.
These include statements relating to the cost savings and accretion to reported
earnings that will be realized from the merger. These forward-looking statements
involve certain risks and uncertainties. Factors that may cause actual results
to differ materially from those contemplated by such forward-looking statements
include, among others, the following possibilities: (1) expected cost savings
from the merger are not fully realized or realized within this expected
timeframe; (2) revenues following the merger are lower than expected; (3)
competitive pressure among financial services companies increases significantly;
(4) costs or difficulties related to the integration of the businesses of the
subsidiary banks are greater than expected; (5) changes in the interest rate
environment reduce interest margins; (6) general economic conditions,
internationally, nationally or in the State of California, are less favorable
than expected; (7) changes in the IRS's handling of electronic filing and refund
payments adversely affect the Company's Refund Anticipation Loan ("RAL") and
refund transfer ("RT") programs; and (8) legislation or regulatory requirements
or changes adversely affect the business in which the combined company will be
engaged.
TOTAL ASSETS AND EARNING ASSETS
The chart below shows the growth in average total assets and deposits since
1995. Annual averages are shown for 1995 and 1996; quarterly averages are shown
for 1997, 1998, and 1999. For the Company, changes in assets are primarily
related to changes in deposit levels, so the deposit balances also have been
included in the chart. Because significant deposits are sometimes received at
the end of a quarter and are quickly withdrawn, especially at year-end, the
overall trend in the Company's growth is better shown by the use of average
balances for the quarters.
<PAGE>
Chart 1 GROWTH IN AVERAGE ASSETS AND DEPOSITS ($ in millions)
$2,800 AAAA
$2,700 A
$2,650
A
$2,600
AAA
$2,550 A
A
$2,500 AAA
A
$2,450 DDDD
A
$2,400 AAAAAAAA D
A
$2,350 D
A
$2,300 AAA DDD
D
$2,250 A D
DDD
$2,200 A D
$2,150 D
AAA DDDDDDDD
$2,100 AA D
AAA
$2,050 D
A DDD
$2,000
A D
$1,950 AAA
$1,900 A D
$1,850 DDD
A DD
$1,800 DDD
AAA
$1,750 D
D
$1,700 A DDD
$1,650 D
A
$1,600 D
AAAA
$1,550 DDD
$1,500 D
$1,450
D
$1,400
DDDD
$1,350
$1,300
1st 2nd 3rd 4th 1st 2nd 3rd 4th 1st
'95 '96 '97 '97 '97 '97 '98 '98 '98 '98 '99
A = Assets D = Deposits
The growth trend shown above for the Company is in part due to the continued
consolidation in the financial services industry. The Company has obtained new
customers as they became dissatisfied when the character of their local bank was
changed by an acquiring institution. The Company also acquired First Valley Bank
and Citizens State Bank in 1997 and merged them into SBB&T. Contrary to the
general pattern of banks losing customers of the acquired institution, deposits
of these two banks have kept their deposits with SBB&T. SBB&T has also opened
six new offices in Ventura County and one new office in Northern Santa Barbara
County during the period covered by the chart. FNB has increased its deposits
$423 million or 255% in the period covered above.
Earning assets consist of the various assets on which the Company earns interest
income. On average, the Company earned interest on 93.8% of its assets during
the first three months of 1999. This compares with an average of 89.3% for all
FDIC-Insured Commercial Banks. (See Note 1. Notes to this analysis are found at
the end of this analysis.) Having more of its assets earning interest helps the
Company to maintain its high level of profitability. The Company has achieved
this higher percentage by several means. Loans are structured to have interest
payable in most cases each month so that large amounts of accrued interest
receivable (which are nonearning assets) are not built up. In this manner, the
interest received can be invested to earn additional interest. The Company
leases most of its facilities under long-term contracts rather than owning them.
This, together with the aggressive disposal of real estate obtained as the
result of foreclosure avoids tying up funds that could be earning interest.
Lastly, the Company has developed systems for clearing checks faster than those
used by most banks of comparable size. This permits it to put the cash to use
more quickly. At the Company's current size, these and other steps have resulted
in about $126 million more assets earning interest during the first three months
of the year than would be the case if the Company's ratio were similar to its
FDIC peers. The additional earnings from these assets are somewhat offset by
higher lease expense, additional equipment costs, and occasional losses taken on
quick sales of foreclosed property. However, on balance, Management believes
that these steps give the Company an earnings advantage.
INTEREST RATE SENSITIVITY
Most of the Company's earnings arise from its functioning as a financial
intermediary. As such, it takes in funds from depositors and then either lends
the funds to borrowers or invests the funds in securities and other instruments.
The Company earns interest income on the loans and securities and pays interest
expense on deposits and other borrowings. Net interest income is the difference
in dollars between the interest income earned and the interest expense paid. The
net interest margin is the ratio of net interest income to average earning
assets. This ratio is useful in allowing the Company to monitor the spread
between interest income and interest expense from month to month and year to
year irrespective of the growth of the Company's assets. If the Company is able
to maintain the net interest margin as the Company grows, the amount of net
interest income will increase.
The Company must maintain its net interest margin to remain profitable, and must
be prepared to address the risks of adverse effects on the margin as interest
rates change. Because the Company earns interest income on almost 94% of its
assets and pays interest expense on approximately 75% of its liabilities, these
adverse effects could be material if not managed properly. The three primary
risks related to changes in interest rates are market risk, mismatch risk, and
basis risk. The rest of this section briefly explains these risks and the steps
the Company takes to manage them. Interested readers are referred to
Management's Discussion and Analysis of Financial Condition and the Results of
Operations in the Company's Annual Report on Form 10-K for 1998 ("10-K MD&A")
for a more complete discussion.
Some of the Company's loans, securities, and deposits have rates of interest
fixed for some term. Market risk is the risk that the market value of these
financial instruments will decrease with changes in market interest rates. This
exposure to market risk is managed by limiting the amount of fixed rate assets
and by keeping maturities short. Mismatch risk is the risk that interest rate
changes may not be equally reflected in the rates of interest earned and paid
because of differences in the contractual terms of the assets and liabilities
held. The Company controls mismatch risk by attempting to roughly match the
maturities and repricing opportunities of assets and liabilities. Basis risk
arises from the fact that interest rates rarely change in a parallel or equal
manner. The interest rates associated with the various assets and liabilities
differ in how often they change, the extent to which they change, and whether
they change sooner or later than other interest rates. Avoiding concentration in
only a few types of assets or liabilities is the best means of increasing the
chance that the average interest received and paid will move in tandem. The
wider diversification means that many different rates, each with their own
volatility characteristics, will come into play.
One of the means by which the Company monitors the extent to which the
maturities or repricing opportunities of the major categories of assets and
liabilities are matched is an analysis such as that shown in Table 1. This
analysis is sometimes called a "gap" report, because it shows the mismatch or
gap between assets and liabilities repricing or maturing in each of a number of
time periods. The gap is stated in both dollars and as a percentage of total
assets for each period and on a cumulative basis for each period. The Company's
target is stated as a percentage of total assets and is to be no more than 15%
plus or minus in either of the first two periods, and not more than 25% plus or
minus cumulative through the first year. The Company's gaps were within the
target ranges at March 31, 1999.
Many of the categories of assets and liabilities on the balance sheet do not
have specific maturities or contractual resetting of their interest rates. For
the purposes of this table, the Company assigns these pools of funds to a likely
repricing period. However, the assumptions underlying the assignment of the
various classes of non-term assets and liabilities are somewhat arbitrary in
that the timing of the repricing is often a function of competitive influences
and the frequency of changes in external market rates. For example, if other
financial institutions are increasing the rates offered depositors, the Company
may have no choice but to reprice sooner than it assumed in order to maintain
market share.
The first period shown in the gap report covers assets and liabilities that
mature or reprice within the first three months after quarter-end. This is the
most critical period because there would be little time to correct a mismatch
that is having an adverse impact on income. For example, if the Company had a
large negative gap for the period--with liabilities maturing or repricing within
the next three months significantly exceeding assets maturing or repricing in
that period--and interest rates rose suddenly, the Company would have to wait
for more than three months before an equal amount of assets could be repriced to
offset the higher interest expense on the liabilities. As of March 31, 1999, the
gap for this first period is a negative 6.64%.
For the next period, after three months but within six months, there is an
excess of liabilities over assets of 2.44%.
In the third period, after six months but within one year, liabilities exceed
assets by 14.52% of total assets, reflecting the current customer preference for
short-term deposits. The cumulative gap within one year is a negative 23.60% of
assets. Management is planning actions to be taken should this cumulative gap
increase. The periods of over one year are less critical because more steps can
be taken to mitigate the adverse effects of any interest rate changes arising
from repricing mismatches.
<PAGE>
<TABLE>
Table 1--INTEREST RATE SENSITIVITY
<CAPTION>
After three After six After one Non-interest
As of March 31, 1999 Within months months year but bearing or
(in thousands) three but within but within within After five non-repricing
months six one year five years items Total
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loans $ 680,441 $ 98,167 $ 129,630 $ 611,514 $ 158,326 $ (1,825) $ 1,676,253
Cash and due from banks -- -- -- -- -- 115,394 115,394
Money market investments 85,788 -- -- -- -- -- 85,788
Securities 74,350 42,969 92,080 408,019 90,291 9,762 717,471
Other assets -- -- -- -- -- 105,356 105,356
----------------------------------------------------------------------------- -----------
Total assets 840,579 141,136 221,710 1,019,533 248,617 228,687 $ 2,700,262
----------------------------------------------------------------------------- ===========
Liabilities and shareholders' equity:
Borrowed funds:
Repurchase agreements and
Federal funds purchased 16,670 -- -- -- -- -- 16,670
Other borrowings 3,809 2,500 5,000 32,500 13,500 -- 57,309
Interest-bearing deposits:
Savings and interest-bearing
transaction accounts 631,024 -- 436,675 -- -- -- 1,067,699
Time deposits 354,751 204,635 172,078 59,200 3,394 -- 794,058
Demand deposits -- -- -- -- -- 499,953 499,953
Other liabilities 13,622 -- -- -- -- 26,760 40,382
Shareholders' equity -- -- -- -- -- 224,191 224,191
------------------------------------------------------------------------------ ----------
Total liabilities and
shareholders' equity 1,019,876 207,135 613,753 91,700 16,894 750,904 $ 2,700,262
----------------------------------------------------------------------------- ===========
Interest rate-
sensitivity gap $ (179,297) $ (65,999) $ (392,043) $ 927,833 $ 231,723 $ (522,217)
=============================================================================
Gap as a percentage of
total assets (6.64%) (2.44%) (14.52%) 34.36% 8.58% (19.34%)
Cumulative interest
rate-sensitivity gap $ (179,297) $ (245,296) $ (637,339) $ 90,494 $ 522,217
Cumulative gap as a
percentage of total assets (6.64%) (9.08%) (23.60%) 10.76% 19.34%
<FN>
Note: Net deferred loan fees, overdrafts, and the allowance for loan losses are
included in the above table as noninterest bearing or non-repricing
items. Money market investments include Federal funds sold and securities
purchased under agreements to resell.
</FN>
</TABLE>
Gap reports can show mismatches in the maturities and repricing opportunities of
assets and liabilities, but have limited usefulness in measuring or managing
market risk and basis risk.
To quantify the extent of these risks both in its current position and in
transactions it might take in the future, the Company uses computer modeling.
The modeling simulates the impact of different interest rate scenarios on both
net interest income and on net economic value. Net economic value or the market
value of portfolio equity is defined as the difference between the market value
of financial assets and liabilities.
A standard practice in the industry is to compute the impacts of interest rate
"shocks" applied to the Company's asset and liability balances. Although
interest rates normally would not change suddenly in this manner, this exercise
is valuable in identifying exposures to risk and in providing comparability both
with other institutions and between periods. The resulting shock reports
indicate how much of the Company's net interest income and net economic value
are "at risk" (deviation from the base level) from the rate changes. The results
reported below for the Company's December 31, 1998, and March 31, 1999 balances
indicate that the Company's net interest income at risk over a one year period
and net economic value at risk from 2% shocks are within normal expectations for
such sudden changes:
Shocked by -2% Shocked by +2%
As of December 31, 1998
Net interest income (3.95%) +3.65%
Net economic value +2.43% (12.08%)
As of March 31, 1999
Net interest income +1.13% (0.55%)
Net economic value +8.54% (16.89%)
The changes in net interest income and net economic value resulting from the
hypothetical increases and decreases in rates are not exactly symmetrical in
that the same percentage of increase and decrease in the hypothetical interest
rate will not cause the same percentage change in net interest income or net
economic value. This occurs because various contractual limits and
non-contractual factors come into play. An example of the former is the
"interest rates cap" on loans, which may limit the amount that rates may
increase. An example of the latter is the assumption of to what extent rates
could be lowered on administered rate accounts. The degree of symmetry changes
as the base rate changes from period to period and as there are changes in the
Company's product mix. For instance, the assumed floors on deposit rates are
more likely to come into play in a 2% decrease if the base rate is lower. The
caps on loan rates which generally are present only in consumer loans would have
more of an impact on the overall result to the extent that consumer variable
rate loans are a larger proportion of the portfolio than in a previous period.
For these computations, the Company has made certain assumptions that
significantly impact the results. For example, the Company must make assumptions
about the duration of its non-maturity deposits because they have no contractual
maturity, and about the rates that would be paid on the Company's administered
rate deposits as external yields change.
In addition to the simulations using the sudden rate changes, the hypothetical
scenarios also include gradual interest rate changes. The most recent modeling
using these more realistic hypothetical scenarios confirms that the Company's
interest rate risk profile is balanced, i.e., the negative impact on net
economic value from hypothetical changes in interest rates is not excessive, and
that the results are within normal expectations. However, along with the
assumptions used for the shock computations, these computations using gradual
changes require certain additional assumptions with respect to the magnitude,
direction and volatility of the interest rate scenarios selected which affect
the results.
The Company's exposure to interest rate risk as of December 31, 1998, is
discussed in more detail in the 10-K MD&A. There have been no material changes
to this exposure during the first three months of 1999.
DEPOSITS AND RELATED INTEREST EXPENSE
While occasionally there may be slight decreases in average deposits from one
quarter to the next, the overall trend is one of growth as shown in Chart 1. The
rate of growth of any financial institution is restrained by the capital
requirements discussed in the section of this analysis titled "Capital Resources
and Company Stock". Growth at too rapid a pace will result in capital ratios
that are too low. The orderly growth experienced by the Company has been planned
by Management and Management anticipates that it can be sustained because of the
strong capital position and earnings record of the Company. The increases have
come by maintaining competitive deposit rates, introducing new deposit products,
the opening of new retail branch offices, the assumption of deposits in the FVB
and CSB acquisitions, and successfully encouraging former customers of merged
financial institutions to become customers of the Company.
Table 2 presents the average balances for the major deposit categories and the
yields of interest-bearing deposit accounts for the last eight quarters. As
shown both in Chart 1 and in Table 2, average deposits for the first quarter of
1999 have increased $346.8 million or 16.4% from average deposits a year ago.
<TABLE>
Table 2--AVERAGE DEPOSITS AND RATES
(dollars in millions)
<CAPTION>
1998: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NOW accounts $ 271.3 1.16% $ 271.0 1.14% $ 280.2 1.14% $ 290.0 1.02%
Money market deposit accounts 524.6 3.51 542.2 3.51 563.5 3.50 580.1 3.11
Savings accounts 182 2.37 181.9 2.36 188.5 2.41 196.0 2.10
Time certificates of deposit for
less than $100,000 and IRA's 410.6 5.47 418.7 5.37 429.5 5.30 448.5 5.16
Time certificates of deposit for
$100,000 or more 282 5.42 285.4 5.34 308.7 5.30 324.4 5.08
----------- ----------- ----------- -----------
Interest-bearing deposits 1,670.5 3.81% 1,699.2 3.77% 1,770.4 3.76% 1,839.0 3.52 %
Demand deposits 442.4 415.5 448.0 457.8
----------- ----------- ----------- -----------
Total deposits $ 2,112.9 $ 2,114.7 $ 2,218.4 $ 2,296.8
=========== =========== =========== ===========
1999:
NOW accounts $ 291.2 0.82%
Money market deposit accounts 579.6 2.95
Savings accounts 199.5 2.04
Time certificates of deposit for
less than $100,000 and IRA's 448.8 4.93
Time certificates of deposit for
$100,000 or more 337.2 4.83
-----------
Interest bearing deposits 1,856.3 3.34%
Demand deposits 603.4
-----------
Total deposits $ 2,459.7
===========
</TABLE>
Administered rate deposit accounts are those products which the institution
reprices at its option based on competitive pressure and need for funds. This
contrasts with deposits for which the rates are set by contract for a term or
are tied to an external index such as Certificate of Deposit. The average rates
that are paid on deposits generally trail behind money market rates. This
trailing characteristic is usually stronger with time deposits than with deposit
types that have administered rates. This occurs because while financial
institutions do not usually change interest rates on NOW, MMDA, and savings
accounts with each small increase or decrease in short-term rates, once market
rates have changed sufficiently to require adjustment in the administered rate
accounts, all accounts reprice at once. In contrast, with time deposit accounts,
while offering rates are changed more frequently, the average rates paid during
the quarter are a blend of the rates paid on individual accounts. Only new
accounts and those that mature and are replaced during the quarter will bear the
new rate.
Table 2 would seem to show the opposite of the general rule that administered
rate deposits are more reflective of changes in market rates as the rates paid
on the administered rate deposit accounts (NOW, MMDA, and savings accounts)
remained quite stable over the first three quarters of 1998, with declines in
the last two quarters. On the other hand, the rates on time certificate accounts
declined during the whole period covered by the table. However, the stability of
the rates paid on the administered accounts during the first three quarters of
1998 in fact reflected the lowering of rates in 1997 to match market rates, with
the rates paid on the time deposits gradually catching up to the 1997 market
rate changes. Rates paid on administered deposits were decreased late in the
third quarter of 1998 and again in the fourth quarter of 1998 to reflect
declines in the market rates driven by Federal Reserve Board actions to spur the
economy.
The average balances for noninterest-bearing demand deposits during the first
quarters of 1998 and 1999 were impacted by outstanding checks (which by
regulation are classified as demand deposits) from the RAL and RT programs
discussed below in "Refund Anticipation Loan and Refund Transfer Programs."
Approximately $58.3 million of the average balance for noninterest-bearing
demand deposits in the first quarter of 1998 and $148.9 million in the first
quarter of 1999 relate to these programs. There was relatively little effect
from these checks in other quarters.
Generally, the Company offers higher rates on certificates of deposit in amounts
over $100,000 than for lesser amounts. It would be expected, therefore, that the
average rate paid on these large time deposits would be higher than the average
rate paid on time deposits with smaller balances. As may be noted in Table 2,
however, this is not the case. There are two primary reasons for this.
First, loan demand has not been so great as to create a need for funds such that
the Company would encourage, large deposits through premium rates. If the
deposits are short-term and will be kept by the depositor with the Company only
while premium rates are paid, the Company must invest the funds in very
short-term assets, such as Federal funds. Since Federal funds sold earned
between 4.79% and 5.67% during 1998 and the first three months of 1999, the
spread between the cost of premium rate CD's and the earnings on their potential
uses would be very small, if not negative. Second, a significant portion of the
under $100,000 time deposits are IRA accounts. The Company pays a higher rate on
these accounts than on other CD's because their terms tend to be relatively
longer than other CD's. These factors have served to maintain a higher average
rate paid on the smaller time deposits relative to the average rate paid on
larger deposits.
The Company has not utilized any brokered deposits.
LOANS AND RELATED INTEREST INCOME
Table 3 shows the changes in the end-of-period (EOP) and average loan portfolio
balances and taxable equivalent income and yields (Note 2) over the last six
quarters (dollars in millions),
<TABLE>
Table 3--LOAN BALANCES AND YIELDS
<CAPTION>
EOP Average Interest Average
Quarter Ended Outstanding Outstanding and Fees Yield
- -------------------- -------------- --------------- -------------- ----------
<S> <C> <C> <C> <C>
December 1997 $ 1,311 $1,275 $30.2 $ 9.40
March 1998 1,353 1,356 36.9 11.04
June 1998 1,390 1,369 32.9 9.65
September 1998 1,442 1,414 33.1 9.28
December 1998 1,583 1,491 35.5 9.45
March 1999 1,708 1,683 43.2 10.36
</TABLE>
The end-of-period loan balance as of March 31, 1999, has increased by $125.0
million compared to December 31, 1998, and by $354.9 million compared to March
31, 1998. Residential real estate loans have increased as a result of increased
purchase activity in the Company's market areas and due to refinancing activity
prompted by the favorable interest rate environment. Most of the residential
real estate loans held are adjustable rate mortgages ("ARMS") that have initial
"teaser" rates. The yield increases for these loans as the teaser rates expire.
Applicants for these loans are qualified based on the fully-indexed rate. During
the second half of 1998 and the first quarter of 1999, the Company retained a
portion of the long term, fixed-rate 1-4 family residential loans it originated.
Previously, the Company had sold almost all of its long term, fixed-rate
residential loans because of concerns for market risk if rates were to rise.
However, with rates at very low levels, most consumers wanted fixed rate loans
and so the Company elected to hold some of these. The Company has taken several
steps to reduce the interest rate risk. Among these steps are borrowing some of
the money to fund the holding of these loans at fixed rates for terms expected
to match the likely length of time the loans will be outstanding. The Company is
also considering the use of interest rate swaps or other such financial
instruments to mitigate the negative impact from rises in interest rates.
The consumer loan portfolio has increased primarily because of an increased
number of indirect auto loans. Indirect auto loans are loans purchased from auto
dealers. The dealers' loans must meet the credit criteria set by the Company.
The average balance and yield for the first quarters of 1999 and 1998 show the
impact of the RAL loans that the Company makes. The RAL loans are extended to
taxpayers who have filed their returns electronically with the IRS and do not
want to wait for the IRS to send them their refund check. The Company earns a
fixed fee per loan for advancing the funds. Because of the April 15 tax filing
date, almost all of the loans are made and repaid during the first quarter of
the year. More information on this program may be found in the section titled
"Refund Anticipation Loan and Refund Transfer Programs" below and in the 10-K
MD&A. Average yields for the first quarter of 1999 and 1998 without the effect
of RAL loans were 8.92% and 9.35%, respectively.
Interest rates on most consumer loans are fixed at the time funds are advanced.
The average yields on these loans significantly lag market rates as rates rise
because the Company only has the opportunity to increase yields as new loans are
made. In a declining interest rate environment, these loans tend to track market
rates more closely. This is because the borrower may reset the rate by prepaying
the loan if the current market rate for that type of loan declines sufficiently
below the contractual rate on the original loan to warrant the customer
refinancing.
The rates on most commercial and construction loans vary with an external index
like the national prime rate or the one year constant maturity treasury ("CMT").
The loans that are tied to prime adjust immediately to a change in those rates
while the loans tied to CMT usually adjust every year.
OTHER LOAN INFORMATION
In addition to the outstanding loans reported in the accompanying financial
statements, the Company has made certain commitments with respect to the
extension of credit to customers.
(in thousands) March 31, December 31,
1999 1998
Standby letters of credit $ 26,633 $ 21,782
Loan commitments 131,238 115,401
Undisbursed loans 59,347 63,888
Unused consumer credit lines 79,094 71,544
Unused other credit lines 236,034 146,514
The majority of the commitments are for one year or less. The majority of the
credit lines and commitments may be withdrawn by the Company subject to
applicable legal requirements. With the exception of the undisbursed loans, the
Company does not anticipate that a majority of the above commitments will be
fully drawn on by customers. Consumers do not tend to borrow the maximum amounts
available under their home equity lines and businesses typically arrange for
credit lines in excess of their expected needs to handle contingencies.
The Company has established maximum loan amount to collateral value ratios for
commercial real estate loans ranging from 50% to 75% depending on the type of
project. Maximum loan-to-value ratios for residential real estate loans range
from 65% to 90%. There are no specific maximum loan-to-value ratios for other
commercial, industrial or agricultural loans not secured by real estate. The
adequacy of the collateral is established based on the individual borrower and
purpose of the loan. Consumer loans may have maximum loan-to-collateral ratios
based on the loan amount, the nature of the collateral, and other factors.
The Company defers and amortizes loan fees collected and origination costs
incurred over the lives of the related loans. For each category of loans, the
net amount of the unamortized fees and costs are reported as a reduction or
addition, respectively, to the balance reported. Because the fees collected are
generally less than the origination costs incurred for commercial and consumer
loans, the total net deferred or unamortized amounts for these categories are
additions to the loan balances.
CREDIT QUALITY AND THE ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is provided in recognition that not all loans
will be fully paid according to their contractual terms. The Company is required
by regulation, generally accepted accounting principles, and safe and sound
banking practices to maintain an allowance that is adequate to absorb losses
that are inherent in the portfolio of loans and leases, including those not yet
identified. The adequacy of this general allowance is based on the size of the
portfolio, historical trends of charge-offs, and Management's estimates of
future charge-offs. These estimates are in turn based on the grading of
individual credits and Management's outlook for the local and national economies
and how they might affect borrowers. In addition, generally accepted accounting
standards require the establishment of a valuation allowance for impaired loans
as described in Note 5 to the financial statements.
Table 4 shows the amounts of noncurrent loans and nonperforming assets for the
Company at the end of the first quarter of 1999, and at the end of the previous
four quarters. Also shown for both the Company and its peers (Note 3) are the
coverage ratio of the allowance to total loans and the ratio of noncurrent loans
to total loans.
Nonperforming assets include noncurrent loans and foreclosed collateral
(generally real estate). The dollar amount of nonperforming assets increased
substantially during the quarter ended March 31, 1999, as the Company stopped
accruing interest on one large loan. The borrower is a high-tech manufacturing
firm that has experienced difficulties due to the turmoil in foreign markets.
The Company is participating in this loan with a number of other banks; its
portion is approximately $7 million. The group of creditors is working with the
borrower to recapitalize, or if this fails, to restructure the loan to extend
the terms and thereby bring the debt service requirements within what the
borrower can afford. The Company has allocated an appropriate amount of the
allowance for credit losses to this loan to cover any probable loss.
<TABLE>
Table 4--ASSET QUALITY
(dollars in thousands)
<CAPTION>
March 31, December 31, September 30, June 30, March 31,
1999 1998 1998 1998 1998
--------- ------------ ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
COMPANY AMOUNTS:
Loans delinquent
90 days or more $ 301 $ 78 $ 428 $ 763 $ 726
Nonaccrual loans 17,915 8,148 8,706 9,440 12,342
--------- --------- --------- ---------- ---------
Total noncurrent loans 18,216 8,226 9,134 10,203 13,068
Foreclosed real estate -- -- 58 200 200
--------- --------- --------- ---------- ---------
Total nonper-
forming assets $ 18,216 $ 8,226 $ 9,192 $ 10,403 $ 13,268
========= ========= ========= ========== =========
Allowance for credit losses
other than RALs 29,637 28,963 28,485 27,866 23,411
Allowance for RALs 1,871 333 204 -- 2,936
--------- --------- --------- ---------- ---------
Total allowance $ 31,508 $ 29,296 $ 28,689 $ 27,866 $ 26,347
========= ========= ========= ========== =========
COMPANY RATIOS (Exclusive of RALs):
Coverage ratio of
allowance for credit
losses to total loans 1.75% 1.83% 1.98% 2.00% 1.74%
Coverage ratio of
allowance for credit
losses to noncurrent loans 163% 352% 312% 273% 179%
Ratio of noncurrent
loans to total loans 1.08% 0.52% 0.63% 0.73% 0.97%
Ratio of nonperforming
assets to total assets 0.68% 0.31% 0.36% 0.43% 0.55%
FDIC PEER
GROUP RATIOS:
Coverage ratio of
allowance for credit
losses to total loans n/a 2.04% 2.10% 2.14% 2.16%
Coverage ratio of
allowance for credit
losses to noncurrent loans n/a 199% 202% 209% 204%
Ratio of noncurrent
loans to total loans n/a 1.02% 1.04% 1.03% 1.06%
Ratio of nonperforming
assets to total assets n/a 0.71% 0.74% 0.73% 0.76%
</TABLE>
The Company ratios above are computed exclusive of the RALs and the related
allowance for credit losses. This is done to improve comparability with the
Company's peers. Only two other banks operate national RAL and RT programs.
Based on the prior year experience and other factors, the Company provides an
allowance specifically for RALs as the loans are made. As discussed below in the
section titled "Refund Anticipation Loan and Refund Transfer Programs", almost
all of the RALs are made in the first quarter, with a smaller number in the
second quarter. Therefore, there is a substantial allowance for RALs at the end
of each first quarter, which distorts the ratios. The Company charges off unpaid
RALs significantly earlier than other loans, usually after about 6 weeks, before
these loans would be classified as "nonperforming" under generally used industry
standards. With no RALs in the total of nonperforming loans, it is more
meaningful to exclude them from the balance for total loans and to exclude the
portion of the allowance allocated specifically to them in computing the ratios.
There are small amounts of allowance for credit losses related to RALs at the
end of the third and fourth quarters that are the result of collection of
previously charged-off RALs.
The allowance for credit losses other than RALs compared to total loans has
remained relatively stable during the last five quarters. The coverage ratio of
allowance to noncurrent loans declined primarily because of the reclassification
of the one large loan noted above. While the ratio of noncurrent loans to total
loans doubled during the first quarter of 1999, the Company's ratio at 1.08% is
still just above the 1.02% ratio of its peers.
It is to be expected that the Company's credit ratios will vary more than those
of its peers. First, some financial institutions have a large proportion of
their loans made up of many, relatively small loans like consumer installment,
credit card, or 1-4 family residential loans. These institutions will find that
their nonperforming ratios tend to vary less because of the diversification
effect of the large number of loans, much like the Company experiences with its
RAL program. However, the Company's portfolios also include nonresidential real
estate, commercial loans, and some agricultural loans. These loans are not part
of large homogenous groups for which credit loss can be as easily predicted.
Instead, these loans are relatively few in number and represent relatively large
balances for the Company. If one of these loans become nonperforming or if one
is brought back by the borrower into a performing status, the Company's ratios
are impacted. Statistical models are also less useful in determining how much
allowance must be provided to cover losses inherent in these portfolios. The
Company considers these factors in setting its overall allowance for credit
losses, and based on its current knowledge and judgment, the appropriate amount
will vary from the average amount provided by its peers. Second, the Company's
ratios will also vary more than the peer average simply because the latter is an
average and differences and changes at individual banks tend to offset each
other.
Management identifies and monitors other loans that are potential problem loans
although they are not now delinquent more than 90 days. Table 5 classifies
noncurrent loans and all potential problem loans other than noncurrent loans by
loan category for March 31, 1999 (amounts in thousands).
Table 5--NONCURRENT AND OTHER POTENTIAL PROBLEM LOANS
Noncurrent Other Potential
Loans Problem Loans
----- -------------
Loans secured by real estate:
Construction and
land development $ 15 $ 351
Agricultural 25 3,521
Home equity lines 204 674
1-4 family mortgage 2,531 2,175
Multifamily -- --
Nonresidential, nonfarm 5,287 6,674
Commercial and industrial 8,780 16,883
Leases 296 --
Other consumer loans 1,075 957
Other Loans 3 22
------- -------
Total $18,216 $31,257
======= =======
The following table sets forth the allocation of the allowance for all potential
problem loans by classification as of March 31, 1999 (amounts in thousands).
Doubtful $3,770
Substandard $3,832
Special Mention $1,297
The total of the above numbers is less than the total allowance. Most of the
allowance is allocated to loans which are not currently regarded as potential
problem loans. The amounts allocated both to potential problem loans and to all
other loans are determined based on the factors and methodology discussed in
Note 1 to the Consolidated Financial Statements presented in the Company's
Annual Report on Form 10-K. Based on these considerations, Management believes
that the allowance for credit losses at March 31, 1999 was adequate to cover the
losses inherent in the loan and lease portfolios as of that date.
SECURITIES AND RELATED INTEREST INCOME
The Company has created three separate portfolios of securities for internal
management purposes. The first portfolio, for securities that will be held to
maturity, is the "Earnings Portfolio." This portfolio includes practically all
of the tax-exempt municipal securities and some of the longer term taxable
securities. The second and third portfolios consist of securities that are all
classified as available-for-sale. The second portfolio, the "Liquidity
Portfolio," is made up almost entirely of the shorter term Treasury and
government-sponsored Agency securities. The third portfolio, the "Discretionary
Portfolio," consists of shorter term Treasury and government-sponsored Agency
securities, mortgage-backed securities (including collateralized mortgage
obligations), asset-backed securities, and a few municipal securities. The
Company specifies whether the security will be held to maturity--and therefore
placed in the Earnings Portfolio--or available for sale at the time of purchase.
Securities may be transferred between the Liquidity and Discretionary Portfolios
at the Company's option. The reasons for these portfolios are explained in the
10-K MD&A.
Table 6 presents the combined securities portfolios, showing the average
outstanding balances (dollars in millions) and the yields for the last five
quarters. The yield on tax-exempt state and municipal securities has been
computed on a taxable equivalent basis. A computation using this basis increases
income shown in the table for these securities over the amount accrued and
reported in the accompanying financial statements. The tax-exempt income is
increased to that amount which, were it fully taxable, would yield the same
income after tax as the amount that is reported in the financial statements. The
computation assumes a combined Federal and State tax rate of approximately 42%.
<TABLE>
Table 6--AVERAGE BALANCES OF SECURITIES AND INTEREST YIELD
<CAPTION>
1998 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
-------------------- --------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 282.2 5.98% $ 258.6 5.95% $ 221.3 5.91% $ 210.2 5.93%
U.S. Agency 79.4 5.97 101.2 5.90 151.7 5.86 151.6 5.56
Asset-backed securities 6.3 4.72 14.5 6.15 14.3 6.02 14.0 5.72
Mortgage-backed
Securities 206.2 6.74 211.5 5.99 213.2 6.18 222.4 6.12
Tax-Exempt securities 132.1 10.79 141.2 10.24 141.4 10.38 138.6 10.44
Equity securities 8.8 5.49 8.9 5.47 9.0 5.57 9.0 5.56
--------- ---------- ---------- ----------
Total $ 715.0 7.07% $ 735.9 6.77% $ 750.9 6.82% $ 745.8 6.74%
========= ========== ========== ==========
1999
U.S. Treasury $ 204.1 5.95%
U.S. Agency 162.4 5.85
Asset-backed securities 15.3 5.66
Mortgage-backed
Securities 215.7 6.18
Tax-Exempt securities 134.8 10.54
Equity securities 9.1 5.25
---------
Total $ 741.4 6.80%
=========
</TABLE>
UNREALIZED GAINS AND LOSSES
As explained in "Interest Rate Sensitivity" above, fixed rate securities are
subject to market risk from changes in interest rates. The relatively large
unrealized gains in the second table in Note 4 to the financial statements for
the municipal securities indicate the significant reduction in interest rates
that has occurred since most of these securities were purchased in 1985 and
1986. The unrealized gain is therefore a measure of how much more the Company
will earn on these securities until their maturity than it would on comparable
securities purchased at current market rates.
HEDGES, DERIVATIVES, AND OTHER DISCLOSURES
The Company established policies and procedures in 1996 to permit limited types
and amounts of off-balance sheet hedges to help manage interest rate risk. The
Company does not currently have any hedges in place. The Company has not
purchased any securities arising out of a highly leveraged transaction, and its
investment policy prohibits the purchase of any securities of less than
investment grade or so-called "junk bonds."
Statement of Financial Accounting Standards No. 133, "Accounting Derivative
Instruments and Hedging Activities", was issued during the second quarter of
1998 and will become effective for the Company as of January 1, 2000 or earlier
should the Company so choose. The Company expects to implement this reporting on
January 1, 2000. This statement is not expected to have a material impact on the
operating results or the financial position of the Company.
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
Cash in excess of the amount needed to fund loans, invest in securities, or
cover deposit withdrawals is sold to other institutions as Federal funds or
invested with other institutions on a collateralized basis as securities
purchased under agreements to resell ("reverse repo agreements"). These
agreements are investments which are collateralized by securities or loans of
the borrower and mature on a daily basis. The sales of Federal funds are on an
overnight basis as well. The amount of Federal funds sold and reverse repo
agreements purchased during the quarter is an indication of Management's
estimation during the quarter of immediate cash needs, the excess of funds
supplied by depositors over funds lent to borrowers, and relative yields of
alternative investment vehicles.
Though they are not securities, the large amount of Federal funds sold and
reverse repo agreements dictate that the Company include them in its liquidity
planning, discussed below in the section entitled "Liquidity", as if they were
components of the Liquidity Portfolio, discussed above in "Securities and
Related Interest Income."
Table 7 illustrates the average balance of funds sold and repurchase agreements
of the Company and the average yields over the last six quarters (dollars in
millions).
Table 7--AVERAGE BALANCES OF FUNDS SOLD AND SECURITIES PURCHASED
UNDER AGREEMENTS TO RESELL AND THEIR RELATED YIELDS
Average Average
Quarter Ended Outstanding Yield
------------- ------------------ ---------
December 1997 $151.1 5.65%
March 1998 131.6 5.64
June 1998 121.5 5.62
September 1998 174.3 5.67
December 1998 204.2 5.12
March 1999 166.9 4.79
The average balance sold into these markets in the first quarters of each year
reflects the large volume of funds received from the IRS related to the refund
anticipation loans and refund transfers processed by the Company during that
time.
The yield curve on Treasury securities became inverted during the third quarter
of 1998, with shorter maturity securities offering higher yields than the longer
maturity securities. The overnight Federal funds and overnight reverse repo
rates were also higher than yields available from one to five year Treasury
securities. Together, these factors meant that the Company was not being paid
for extending maturities, and accordingly the Company increased its position in
overnight funds sold at the higher short-term yields.
BANKERS' ACCEPTANCES AND COMMERCIAL PAPER
Bankers' acceptances are notes owed by a purchaser of merchandise to a vendor.
The notes have been "accepted" or guaranteed by a bank and sold into the
financial markets and function as short-term debt much like commercial paper.
The Company has used bankers' acceptances as an alternative to short-term U.S.
Treasury securities when sufficient Treasury securities are already held to meet
the pledging requirements of certain trust and public deposits and when the
rates available are sufficiently higher than the rates available on comparable
U.S. Treasury obligations. With their relatively short maturities, bankers'
acceptances have been an effective instrument for managing the timing of
near-term cash flows.
In prior years, the Company purchased bankers' acceptances rather than
commercial paper because the yields were more attractive relative to the risk.
While the acceptances of only highly rated financial institutions were utilized,
acceptances have some amount of risk above that of U.S. Treasury securities.
Therefore, the Company required that there be a reasonable spread in the yields
between the bankers' acceptances and U.S. Treasury securities to justify the
assumption of that additional risk. The only banks issuing these instruments
that had both the high credit rating and sufficient incremental yield were
Japanese banks. During 1997, as economic troubles began to adversely impact the
ratings of the Japanese banks issuing these instruments, the Company reduced its
purchases and discontinued them after January 1998. The last acceptance matured
in July 1998.
In place of bankers' acceptances, in 1998 the Company began purchasing
commercial paper issued by highly rated domestic companies.
Table 8 discloses the average balances and yields of bankers' acceptances and
commercial paper for the last six quarters (dollars in millions).
Table 8-- BANKERS' ACCEPTANCES AND COMMERCIAL PAPER
Average Average
Quarter Ended Outstanding Yield
------------- ------------------ -----------
December 1997 $60.8 5.85%
March 1998 47.0 5.94
June 1998 14.3 6.09
September 1998 1.5 6.23
December 1998 7.5 5.63
March 1999 17.9 5.38
OTHER BORROWINGS, LONG-TERM DEBT AND RELATED INTEREST EXPENSE
Other borrowings consist of securities sold under agreements to repurchase,
Federal funds purchased (usually only from other local financial institutions as
an accommodation to them), Treasury Tax and Loan demand notes, and borrowings
from the Federal Reserve Bank ("FRB"). Because the average total of other
borrowings represents a very small portion of the Company's source of funds
(less than 5%), all of these short-term items have been combined for the
following table.
Table 9 indicates for other borrowings the average balance (dollars in
millions), the rates and the proportion of total assets funded by them over the
last six quarters.
Table 9--OTHER BORROWINGS
Average Average Percentage of
Quarter Ended Outstanding Rate Average Total Assets
------------- ------------- -------- --------------------
December 1997 $28.1 4.93% 1.2%
March 1998 25.2 5.06 1.1
June 1998 18.4 4.88 0.8
September 1998 21.2 4.89 0.9
December 1998 33.5 4.40 1.3
March 1999 26.7 4.43 1.0
Long-term debt consists of advances from the Federal Home Loan Bank of San
Francisco ("FHLB"). Advances of $16 million are structured to amortize at $2.0
million per quarter declining to $1.0 million per quarter through the fourth
quarter of 2001. The remainder of the advances totaling $40.0 million mature
between June 2002 and January 2007 in amounts which range from $6.0 million to
$1.5 million
Table 10 indicates the average balances that are outstanding (dollars in
millions) and the rates and the proportion of total assets funded by long-term
debt over the last six quarters.
Table 10--LONG-TERM DEBT
Average Average Percentage of
Quarter Ended Outstanding Rate Average Total Assets
------------- --------------- ------- -------------------
December 1997 $40.1 6.21% 1.7%
March 1998 37.6 6.19 1.6
June 1998 35.1 6.22 1.5
September 1998 32.6 6.25 1.3
December 1998 35.8 5.96 1.4
March 1999 49.3 5.66 1.8
The primary purpose of this long-term debt is to mitigate the market risk
incurred through purchases of various loan and lease portfolios and the
retention of a portion of the fixed-rate 1-4 family residential loans originated
by the Company. As mentioned in the section titled "Interest Rate Sensitivity,"
one of the methods of managing interest rate risk is to match repricing
characteristics of assets and liabilities. When fixed-rate assets are matched by
similar term fixed-rate liabilities, the deterioration in the value of the asset
when interest rates rise is offset by the benefit to the Company from having the
matching debt at lower than market rates.
OTHER OPERATING INCOME
Other operating income consists of income earned other than interest. On an
annual basis, trust fees are the largest component of other operating income.
Management fees on trust accounts are generally based on the market value of
assets under administration. Table 11 shows trust income over the last six
quarters (in thousands).
Table 11--TRUST INCOME
Quarter Ended Trust Income
------------------------- ----------------------
December 1997 $2,522
March 1998 2,865
June 1998 2,816
September 1998 2,900
December 1998 2,880
March 1999 3,351
There are several reasons for the variation in fees from quarter to quarter.
Trust customers are charged for the preparation of the fiduciary tax returns.
The preparation generally occurs in the first quarter of the year. This accounts
for approximately $291,000 of the fees earned in the first quarter of 1998 and
$288,000 of the fees earned in the first quarter of 1999. Variation is also
caused by the recognition of probate fees. These fees are accrued when the work
is completed rather than accruing the fees as the work is done because it is
only upon the completion of probate that the amount of the fee is established by
the court. After adjustment for these seasonal and non-recurring items and
increasing price levels in the stock market, trust income has been increasing
because of growth in the total number of accounts and dollar balances under
management resulting from substantially enhanced marketing efforts.
Other categories of noninterest operating income include various service
charges, fees, and miscellaneous income. Included within "Other Service Charges,
Commissions & Fees" in the following table are service fees arising from credit
card processing for merchants, escrow fees, and a number of other fees charged
for special services provided to customers. Categories of all noninterest
operating income other than trust fees and securities gains or losses are shown
in Table 12 for the last six quarters (in thousands).
Table 12--OTHER INCOME Other Service
Service Charges Charges,
on Deposit Commissions, Other
Quarter Ended Accounts & Fees Income
- --------------------------------------- -------------- -------
December 1997 $2,352 $2,030 $408
March 1998 2,272 6,248 248
June 1998 2,297 2,805 293
September 1998 2,361 2,647 232
December 1998 2,337 2,112 446
March 1999 2,361 7,973 307
The unusually large amounts in "Other Service Charges, Commissions and Fees" for
the first quarters of 1999 and 1998 are due to $5.91 million and $4.33 million,
respectively, of fees received for the electronic transfer of tax refunds as
explained in the section titled "Refund Anticipation Loan and Refund Transfer
Programs."
STAFF EXPENSE
The largest component of noninterest expense is staff expense. Staff size is
closely monitored in relation to the growth in the Company's revenues and
assets.
Table 13 shows the amounts of staff expense incurred over the last six quarters
(in thousands).
Table 13--STAFF EXPENSE
Salary and Profit Sharing and
Quarter Ended Other Compensation Other Employee Benefits
-------------------- -------------------- -----------------------
December 1997 $ 9,449 $1,884
March 1998 10,375 2,285
June 1998 9,837 2,427
September 1998 9,576 2,216
December 1998 10,389 2,173
March 1999 10,677 2,118
There is some increase each quarter caused by the addition of staff. Other
factors cause some variation in staff expense from quarter to quarter. Staff
expense will usually increase in the first quarter of each year because all
Company exempt employees have their annual salary review in the first quarter
with merit increases effective on March 1. In 1999, these averaged approximately
5%. In addition, some temporary staff is added in the first quarter for the RAL
program.
Employee bonuses are paid from a bonus pool, the amount of which is set by the
Board of Directors based on the Company meeting or exceeding its goals for net
income. The Company accrued compensation expense for the pool for employee
bonuses throughout the year as they are earned rather than when they are
actually paid. The accrual is based on projected net income for the year.
The amount for the fourth quarter of 1998 is higher than expected because of
accruals to settle the terms of employment contracts with some of the former
Pacific Capital employees and to provide for separation payments for staff that
would not be retained after the merger is complete.
There is also variability in the amounts reported above for Profit Sharing and
Other Employee Benefits. These amounts include (1) the Company's contribution to
profit sharing plans and retiree health benefits, (2) the Company's portion of
health insurance premiums and payroll taxes, and (3) payroll taxes and workers'
compensation insurance.
The Company's contributions for the profit sharing and retiree health benefit
plans are determined by a formula which is based on pre-tax income, limited by
the amount that is deductible for income taxes. The contribution expense varied
from quarter to quarter as the Company adjusted its estimation of the
contribution that would eventually be deductible.
OTHER OPERATING EXPENSES
The following table shows other operating expenses over the last six quarters
(in thousands).
Table 14--OTHER OPERATING EXPENSE
Occupancy Expense Furniture & Other
Quarter Ended Bank Premises Equipment Expense
------------- ------------- --------- -------
December 1997 $2,050 $1,654 $ 8,018
March 1998 2,043 1,459 6,541
June 1998 2,061 1,525 6,631
September 1998 2,254 1,688 7,531
December 1998 1,950 2,293 17,504
March 1999 2,298 1,560 10,377
The Company leases rather than owns most of its premises. Many of the leases
provide for annual rent adjustments. Equipment expense fluctuates over time as
needs change, maintenance is performed, and equipment is purchased.
The unusually high amount in other expense for the fourth quarter of 1998
relates to expenses incurred to effect the merger. These include fees paid to
consultants and investment bankers.
Table 15 shows a detailed comparison for the major expense items in other
expense for the three-month periods ended March 31, 1999, and 1998 (amounts in
thousands).
<TABLE>
Table 15--OTHER EXPENSE
<CAPTION>
Three-Month Periods
Ended March 31,
-------------------------
1999 1998
----------- ----------
<S> <C> <C>
Professional services $ 2,653 $ 713
RAL processing and incentive fees 500 225
Supplies and sundries 426 387
Postage and freight 457 404
Marketing 550 379
Bankcard processing 679 607
Credit bureau 453 291
Telephone and wire expense 549 391
Charities and contributions 116 106
Software expense 670 394
Operating losses 112 126
Armored car services 173 184
Printing 240 144
Amortization of goodwill 350 350
Other 2,449 1,840
-------- ------
Total $10,377 $6,541
======== ======
</TABLE>
Included in professional services are consultant costs of $1,863,000 that were
incurred by the Company's Information Technology department. The majority of
these costs were incurred to combine operating systems following the merger with
Pacific Capital Bancorp and to address Y2K system issues.
The increase in Bankcard processing fees is a result of an increase in the
number of merchant card processing transactions and from price increases charged
by processors. RAL processing and incentive fees are paid to tax preparers and
filers based on the volume and collectibility of the loans made through them.
The increase in these fees for the three months ended March 31, 1999 compared to
the same period of 1998 reflects the higher volume of RAL transactions for the
program this year as well as the lower loss rate on loans in 1999 as discussed
below in the section titled "Refund Anticipation Loan and Refund Transfer
Programs.
The increase in software expense represents costs incurred to upgrade existing
software and purchase new software to meet the technological needs of the
Company. The investment in technology keeps the Company competitive with
services our customers' demand.
The amounts in the "Other" line of Table 15 comprise a wide variety of
miscellaneous expenses, none of which total more than 1% of revenues. Included
among these is the net operating cost or benefit of other real estate owned
("OREO"). When the Company forecloses on the real estate collateral securing
delinquent loans, it must record these assets at the lower of their fair value
(market value less estimated costs of disposal) or the outstanding amount of the
loan. Costs incurred to maintain or operate the properties are charged to
expense as they are incurred. If the fair value of the property declines below
the original estimate, the carrying amount of the property is written-down to
the new estimate of fair value and the decrease is also charged to this expense
category. If the property is sold at an amount higher than the estimated fair
value, or if income is received from the rental of the property while the
Company is attempting to dispose of it, the gain or income that is realized is
credited to this category.
LIQUIDITY
Liquidity is the ability to raise funds on a timely basis at acceptable cost in
order to meet cash needs, such as might be caused by fluctuations in deposit
levels, customers' credit needs, and attractive investment opportunities. The
Company's objective is to maintain adequate liquidity at all times.
The Company has defined and manages three types of liquidity: (1) "immediate
liquidity," which is the ability to raise funds today to meet today's cash
obligations, (2) "intermediate liquidity," which is the ability to raise funds
during the next few weeks to meet cash obligations over that time period, and
(3) "long term liquidity," which is the ability to raise funds over the entire
planning horizon to meet anticipated cash needs due to strategic balance sheet
changes. Adequate liquidity is achieved by (1) holding liquid assets, (2)
maintaining the ability to raise deposits or borrow funds, and (3) keeping
access open to capital markets.
As explained below, there is a rough correspondence between these three means of
achieving liquidity and the three time horizons, except that the Company has not
needed to access the capital markets for liquidity purposes.
Immediate liquidity is provided by the prior day's balance of Federal funds sold
and repurchase agreements, any cash in excess of the Federal Reserve balance
requirement, unused Federal funds lines from other banks, and unused repurchase
agreement facilities with other banks or brokers. The Company maintains total
sources of immediate liquidity of not less than 5% of total assets, increasing
to higher targets during RAL/RT season. At the end of March 1999, these sources
of immediate liquidity were well in excess of that minimum.
Sources of intermediate liquidity include maturities or sales of bankers'
acceptances and securities in the Liquidity and Discretionary Portfolios,
securities in the Earnings Portfolio maturing within three months, term
repurchase agreements, advances from the FHLB, and deposit increases from
special programs. The Company projects intermediate liquidity needs and sources
over the next several weeks based on historical trends, seasonal factors, and
special transactions. Appropriate action is then taken to cover any anticipated
unmet needs. At the end of March 1999, the Company's intermediate liquidity was
adequate to meet all projected needs.
Long term liquidity would be provided by special programs to increase core
deposits, reducing the size of the investment portfolios, selling or
securitizing loans, and accessing capital markets. The Company's policy is to
plan ahead to address cash needs over the entire planning horizon from actions
and events such as market expansions, acquisitions, increased competition for
deposits, anticipated loan demand, and economic conditions and the regulatory
outlook. At the end of March 1999, the Company's long term liquidity was
adequate to meet cash needs anticipated over its planning horizon.
CAPITAL RESOURCES AND COMPANY STOCK
The following table presents a comparison of several important amounts and
ratios for the first quarter of 1999 and 1998 (dollars in thousands).
<TABLE>
Table 16--CAPITAL RATIOS
<CAPTION>
1st Quarter 1st Quarter
1999 1998 Change
---------- ---------- --------
<S> <C> <C> <C>
Amounts:
Net Income $ 14,521 $ 10,721 $ 3,800
Average Total Assets $2,789,122 $2,401,788 $387,334
Average Equity $ 219,686 $ 197,125 $ 22,561
Ratios:
Equity Capital to Total
Assets (period end) 8.30% 8.19% 0.11%
Annualized Return
on Average Assets 2.08% 1.79% 0.29%
Annualized Return
on Average Equity 26.44% 21.75% 4.69%
</TABLE>
Earnings are the largest source of capital for the Company. For reasons
mentioned in various sections of this discussion, Management expects that there
will be variations from quarter to quarter in operating earnings.
Areas of uncertainty or seasonal variations include asset quality, loan demand,
and RAL and RT operations. A substantial increase in charge-offs would require
the Company to record a larger provision for loan loss to restore the allowance
to an adequate level, and this would negatively impact earnings. If loan demand
increases, the Company will be able to reinvest proceeds from maturing
investments at higher rates, which would positively impact earnings. RAL and RT
earnings, occurring almost entirely in the first quarter, introduce significant
seasonality and cause the return on average assets and return on average equity
ratios to be substantially higher in the first quarter of each year than they
will be in subsequent quarters.
The FRB sets minimum capital guidelines for U.S. banks and bank holding
companies based on the relative risk of the various types of assets. The
guidelines require banks to have capital equivalent to at least 8% of risk
adjusted assets. To be classified as "well capitalized", the Company is required
to have capital equivalent to at least 10% of risk adjusted assets. As of March
31, 1999, the Company's risk-based capital ratio was 12.23%. The Company must
also maintain a Tier I capital (total shareholder equity less goodwill and other
intangibles) to risk adjusted assets ratio of 6% and 5% of average tangible
assets, respectively. As of March 31, 1999, Tier I capital was 10.98% of risk
adjusted assets and 7.38% of average tangible assets.
State law limits the amount of dividends that may be paid by a bank to the
lesser of the bank's retained earnings or the total of its undistributed net
income for the last three years. The dividends needed to be paid by SBB&T to
Santa Barbara Bancorp for the acquisitions of FVB and CSB exceeded the amount
allowable without prior approval of the California Department of Financial
Institutions ("CDFI"). As part of its approval of the acquisitions, the CDFI
approved the excess distributions. During 1998 and for the first quarter of
1999, it also approved other dividends from SBB&T to the Bancorp to fund the
latter's quarterly cash dividends to its shareholders and for other incidental
purposes. SBB&T will continue to need to request approval for dividends until
earnings for the preceding three years exceed dividends paid to Bancorp in the
same three years. Management expects that approval will continue to be granted
due to strong earnings and the well-capitalized position of SBB&T.
There are no material commitments for capital expenditures or "off-balance
sheet" financing arrangements planned at this time. However, as the Company
pursues its stated plan to expand beyond its current market areas, Management
will consider opportunities to form strategic partnerships with other financial
institutions that have compatible management philosophies and corporate cultures
and that share the Company's commitment to superior customer service and
community support. Such transactions, depending on their structure, may be
accounted for as a purchase of the other institution by the Company. To the
extent that consideration is paid in cash rather than Company stock, the assets
of the Company would increase by more than its equity and therefore the ratio of
capital to assets would decrease.
The current quarterly dividend rate is $0.18 per share. When annualized, this
represents a payout ratio of approximately 42% of earnings per share exclusive
of merger costs for the trailing 12 months.
REGULATION
The Company is closely regulated by Federal and State agencies. The Company and
its subsidiaries may only engage in lines of business that have been approved by
their respective regulators, and cannot open or close offices without their
approval. Disclosure of the terms and conditions of loans made to customers and
deposits accepted from customers are both heavily regulated as to content. The
subsidiary banks are required by the provisions of the Community Reinvestment
Act ("CRA") to make significant efforts to ensure that access to banking
services is available to all members of their communities.
As a bank holding company, Bancorp is primarily regulated by the Federal Reserve
Bank ("FRB"). As a member bank of the Federal Reserve System that is
state-chartered, SBB&T's primary Federal regulator is the FRB and its state
regulator is the CDFI. As a nationally chartered bank, FNB's primary regulator
is the Office of the Comptroller of the Currency. As a non-bank subsidiary of
the Company, Sanbarco is regulated by the FRB. Each of these regulatory agencies
conducts periodic examinations of the Company and/or its subsidiaries to
ascertain their compliance with laws, regulations, and safe and sound banking
practices.
The regulatory agencies may take action against bank holding companies and banks
should they fail to maintain adequate capital or to comply with specific laws
and regulations. Such action could take the form of restrictions on the payment
of dividends to shareholders, requirements to obtain more capital from
investors, or restrictions on operations. The Company and the subsidiary banks
have the highest capital classification, "well capitalized," given by the
regulatory agencies and therefore, except for the need for approval of dividends
paid from SBB&T to Bancorp, are not subject to any restrictions as discussed
above. Management expects the Company and the subsidiary banks to continue to be
classified as well capitalized in the future.
REFUND ANTICIPATION LOAN AND REFUND TRANSFER PROGRAMS
Since 1992, the Company has provided loans and refund transfers to taxpayers who
file their income tax returns electronically. These loans and transfers are made
through tax preparers across the country. The Company collects a fee for each
transaction.
If a taxpayer meets the Company's credit criteria for the RAL product, and
wishes to receive a loan with the refund as security, the taxpayer applies for
and receives an advance less the transaction fees, which are considered finance
charges. The Company is repaid directly by the IRS and remits any refund amount
over the amount due the Company to the taxpayer.
There is a higher credit risk associated with RALs than with other types of
loans because (1) the Company does not have personal contact with the customers
of this product; (2) the customers conduct no business with the Company other
than this once a year transaction; and (3) contact subsequent to the payment of
the advance, if there is a problem with the tax return, may be difficult because
many of these taxpayers have no permanent address.
If the taxpayer does not meet the credit criteria or does not want a loan, the
Company can still facilitate the receipt of the refund by the taxpayer through
the RT program. This is accomplished by the Company authorizing the tax preparer
to issue a check to the taxpayer once the refund has been received by the
Company from the IRS. The fees received for acting as a transfer agent are less
than the fees received for the loans.
While the Company is one of very few financial institutions in the country to
operate these electronic loan and transfer programs, the electronic processing
of payments involved in these programs is similar to other payment processing
regularly done by the Company and other commercial banks for their customers
such as direct deposits and electronic bill paying. The RAL and RT programs had
significant impacts on the Company's activities and results of operations during
the first quarters of 1998 and 1999. A more extended description of these
programs may be found in the Company's Form 10-K for 1998.
Gross revenues for the RAL and RT programs were $6.4 million and $4.3 million,
respectively, for the first quarter of 1998, with operating expenses of $1.0
million. The Company added $5.2 million to the RAL allowance for credit loss
through a charge to provision expense during the quarter and added another $1.9
million to the allowance from recoveries on loans charged off in prior years.
The Company charged-off $4.5 million in RALs during this quarter and $7.2
million for the year.
During the first quarter of 1999, the Company recognized fees for RALs of $7.5
million and fees for RTs of $5.9 million. Operating expenses totaled $1.8
million.
The Company estimates that about 3.0% of RALs will not be collected in a timely
fashion from the IRS compared to the 4.0% rate experienced in 1998. Using this
estimate, during the quarter ended March 31, 1999, the Company provided for
these potential losses by adding $2.8 million to the RAL allowance for credit
loss through a charge to provision expense and adding another $2.1 million to
the allowance from recoveries on loans charged off in prior years. The Company
charged-off $3.3 million in RALs against this allowance in the first quarter of
1999. Some of these loans may yet be paid during the remainder of this year or
during the 2000 filing season. In addition, following past practice, the Company
expects to charge-off any remaining uncollected RALs by June 30.
There is no credit risk associated with the refund transfers because checks are
issued only after receipt of the refund payment from the IRS.
Y2K
The Company provided extensive information regarding its preparations for the
Century Date Change in the 1998 10-K MD&A. The discussion here is intended to
update that information.
State of readiness - Since early 1997, the Company has been addressing the
impact of Y2K to its data processing systems. Key financial information and
operational systems were assessed and detailed plans were developed to ensure
that Y2K system modifications were in place for all critical systems. As most of
the critical software is purchased from vendors, the Company is concentrating
its efforts on implementation and testing of Y2K "Compliant" versions provided
by these vendors. Full system validation and certification of these versions
will be performed in 1999.
Costs - The Company continues to estimate that it will spend approximately $2.5
million to address the Y2K issue. Through March 31, 1999, approximately $1.7
million has been spent. However, the impact to operating results for the
remainder of 1999 will be less than the approximately $800,000 expected to be
spent because many of these costs related to the reassignment of internal staff
from other projects and to the purchase of equipment and software, the cost of
which will be amortized over a number of years. Management does not anticipate a
material adverse impact to the Company's results of operations or financial
position.
Risks - The primary risk of failure to adequately address the Y2K problem would
be the inability to process loans and deposit transactions for customers. The
Company also is exposed to risk if its customers, funds providers, or
correspondent financial institutions and brokerage firms are unable to
adequately address Y2K in their own data processing systems. The Company has
contacted all of its major loan customers and those other financial institutions
with whom it has backup borrowing arrangements to ensure that these third
parties are addressing the issue for themselves and their customers. The
Company's risk with respect to loan customers who do not address the Y2K problem
is the risk of non-payment or late payment of loans. The Company's risk with
respect to funds providers is that in the event of a shortage of liquidity they
would not be able to meet their commitments to the Company. The Company's risk
with respect to other financial institutions and brokerage firms is that it may
be unable to settle security transactions. There are also risks to the Company
relating to providers of power and telecommunications not being able to supply
these services.
Contingency Plans - The Company assumes that its critical computer systems will
be prepared for the Y2K, but continues the process of preparing contingency
plans for business operations in the event of power or telecommunications
failures. For non-core operations, the Company will rely on manual processing
until modifications or replacement systems are in place.
- ------------------------------------------------------------------------------
Note 1 - To obtain information on the performance ratios for peer banks, the
Company primarily uses The FDIC Quarterly Banking Profile, published by the FDIC
Division of Research and Statistics. This publication provides information about
all FDIC insured banks and certain subsets based on size and geographical
location. Geographically, the Company is included in a subset that includes 12
Western States plus the Pacific Islands. The information in this publication is
based on year-to-date information provided by banks each quarter. It takes about
2-3 months to process the information. Therefore, the published data is always
one quarter behind the Company's information. For this quarter, the peer
information is for the fourth quarter of 1998. All peer information in this
discussion and analysis is reported in or has been derived from information
reported in this publication.
Note 2 - As required by applicable regulations, tax-exempt non-security
obligations of municipal governments are reported as part of the loan portfolio.
These totaled approximately $8.5 million as of March 31, 1999. The average
yields presented in Table 3 give effect to the tax-exempt status of the interest
received on these obligations by the use of a taxable equivalent yield, assuming
a combined Federal and State tax rate of approximately 42% (while not tax exempt
for the State of California, the State taxes paid on this Federal-exempt income
is deductible for Federal tax purposes). If their tax-exempt status were not
taken into account, interest earned on loans for the first quarter of 1999 would
be $43.2 million and the average yield would be 10.32%. There would also be
corresponding reductions for the other quarters shown in the Table 3. The
computation of the taxable equivalent yield is explained in the section titled
"Securities and Related Interest Income."
Note 3 - Peer data are computed from statistics reported in FDIC Quarterly
Banking Profile, Fourth Quarter, 1998 for banks with total assets from $1-10
billion.
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index:
Exhibit Number Item Description
3 Amendment Number One to Bylaws
27.0399 Financial Data Schedule for March 31, 1999
27.0398 Restated Financial Data Schedule March 31, 1998
The restatement of the Financial Data Schedule gives effect to the
two-for-one (2:1) split of outstanding shares of Common Stock payable on
April 16, 1998 and to the merger between Santa Barbara Bancorp and Pacific
Capital Bancorp which was accounted for as pooling of interests.
(b) One report on Form 8-K was filed during the quarter ended March 31, 1999.
The completion of the merger of Santa Barbara Bancorp and Pacific Capital
Bancorp on December 30, 1998 and a name change of Santa Barbara Bancorp,
the surviving corporate entity in the merger, to Pacific Capital Bancorp,
was reported on a Form 8-K filed with the Commission on January 14, 1999.
<PAGE>
SIGNATURES
Pursuant to the Securities Exchange Act of 1934, the Company has duly caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized:
PACIFIC CAPITAL BANCORP
/s/ David W. Spainhour
David W. Spainhour May 17, 1999
President
Chief Executive Officer
/s/ Donald Lafler
Donald Lafler May 17, 1999
Senior Vice President
Chief Financial Officer
<PAGE>
EXHIBIT 3
RESOLUTION
PACIFIC CAPITAL BANCORP
Santa Barbara, California
AMENDMENT NUMBER ONE TO BYLAWS
RESOLUTION REGARDING NUMBER OF DIRECTORS
Upon motion made, seconded, and unanimously carried, the following
resolution, effective as of the date of the Annual Meeting, was approved:
RESOLVED, that Section 3.2.1 of the Bylaws of the
Corporation is amended to read as follows:
3.2.1 Authorized Number. The number of directors who may be
authorized to serve on the Board of Directors of the
Corporation shall be no less than nine (9) nor more than
seventeen (17). Until a different number within the foregoing
limits is specified in an amendment to this Section
3.2.1within the foregoing limits is specified in an amendment
to this Section 3.2.1 duly adopted by the Board of Directors
or the shareholders, the exact number of authorized directors
shall be twelve (12).
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 115,394
<INT-BEARING-DEPOSITS> 4,050
<FED-FUNDS-SOLD> 71,746
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 544,024
<INVESTMENTS-CARRYING> 173,447
<INVESTMENTS-MARKET> 188,095
<LOANS> 1,707,761
<ALLOWANCE> 31,508
<TOTAL-ASSETS> 2,700,262
<DEPOSITS> 2,361,710
<SHORT-TERM> 16,670
<LIABILITIES-OTHER> 40,382
<LONG-TERM> 57,309
<COMMON> 8,117
0
0
<OTHER-SE> 216,074
<TOTAL-LIABILITIES-AND-EQUITY> 2,700,262
<INTEREST-LOAN> 43,154
<INTEREST-INVEST> 11,264
<INTEREST-OTHER> 2,227
<INTEREST-TOTAL> 56,645
<INTEREST-DEPOSIT> 15,277
<INTEREST-EXPENSE> 16,270
<INTEREST-INCOME-NET> 40,375
<LOAN-LOSSES> 3,719
<SECURITIES-GAINS> (177)
<EXPENSE-OTHER> 27,030
<INCOME-PRETAX> 23,441
<INCOME-PRE-EXTRAORDINARY> 23,441
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,521
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.59
<YIELD-ACTUAL> 6.17
<LOANS-NON> 17,915
<LOANS-PAST> 301
<LOANS-TROUBLED> 16
<LOANS-PROBLEM> 31,257
<ALLOWANCE-OPEN> 29,296
<CHARGE-OFFS> 4,288
<RECOVERIES> 2,781
<ALLOWANCE-CLOSE> 31,508
<ALLOWANCE-DOMESTIC> 31,508
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 99,462
<INT-BEARING-DEPOSITS> 533
<FED-FUNDS-SOLD> 149,546
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 500,168
<INVESTMENTS-CARRYING> 220,281
<INVESTMENTS-MARKET> 235,410
<LOANS> 1,352,864
<ALLOWANCE> 29,315
<TOTAL-ASSETS> 2,423,447
<DEPOSITS> 2,135,292
<SHORT-TERM> 20,394
<LIABILITIES-OTHER> 32,479
<LONG-TERM> 36,719
<COMMON> 5,120
0
0
<OTHER-SE> 193,443
<TOTAL-LIABILITIES-AND-EQUITY> 2,423,447
<INTEREST-LOAN> 36,922
<INTEREST-INVEST> 11,233
<INTEREST-OTHER> 2,511
<INTEREST-TOTAL> 50,666
<INTEREST-DEPOSIT> 15,687
<INTEREST-EXPENSE> 16,582
<INTEREST-INCOME-NET> 34,084
<LOAN-LOSSES> 5,949
<SECURITIES-GAINS> 57
<EXPENSE-OTHER> 22,703
<INCOME-PRETAX> 17,123
<INCOME-PRE-EXTRAORDINARY> 17,123
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,721
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.44
<YIELD-ACTUAL> 6.05
<LOANS-NON> 12,342
<LOANS-PAST> 726
<LOANS-TROUBLED> 168
<LOANS-PROBLEM> 4,631
<ALLOWANCE-OPEN> 25,414
<CHARGE-OFFS> 5,449
<RECOVERIES> 3,401
<ALLOWANCE-CLOSE> 29,315
<ALLOWANCE-DOMESTIC> 29,315
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
